Below are analyst updates on our ten current high-conviction long and short ideas along with Hedgeye CEO Keith McCullough's refreshed levels for each.
Please note that we added Textron (TXT) to the long side of Investing Ideas this week.
LEVELS
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
IDEAS UPDATES
FXB | UUP
We’ll start off with a good snapshot of how U.S. domestic data continues to support our growth and inflation accelerating call (QUAD 2 in our GIP model) currently with both a growth and inflation data point on the same slide – it’s the Chart of the Day from Friday’s Early Look:
- CPI: Headline inflation accelerated for a 5th consecutive month, taking consumer price growth to its highest level in 32-months (since May 2014) at +2.1% in December.
- Industrial Production: Industrial Production just broke a 15-month streak of negative y/y growth (against easy comp, as we’ve forecast for last couple months), coming in at +0.51% y/y. Not to be outdone, capacity utilization is higher y/y for 1st time in 23-months.
With the advent of the December CPI readings, our proprietary CPI tracker is implying the following:
- 2016 actual: 1.3% YoY
- Q1 2017 estimate: 2.4% YoY (with upside to 2.7%)
- Q2 2017 estimate: 2.2% YoY (with upside to 2.5%)
- 2017 estimate: 1.9% YoY (with upside to 2.1%)
Again these would be multi-year highs in inflation readings. The continuing trend can be seen in our key, predictive commodity price sample which continues to be a leading indicator for the direction of inflation:
Click here to read our write-up from last week for an overview on why the current trends in our Growth and Inflation and Policy for an economy (in this case it’s the U.S. & U.K.) are critical for contextualizing this week’s data cocktail. It's a must-read.
TWX
Click here to read our analysis on why we think the AT&T/Time Warner (TWX) deal will be approved.
CRI
Click here to read our analyst's original report.
We think that Carter's (CRI) does not have enough product differentiation by channel, and the online growth in both its own channel as well as the online growth in wholesale partners will allow the consumer to get much smarter in arbing a better price/value. Case in point, the chart below shows a Carter's baby outfit at various retailers. Notice there is a vast range of pricing for identical clothing items at a range of retailers.
Ultimately the consumer will seek out the best value, which will pressure margins through the wholesale supply chain. This leads to both margin and sales pressure for Carter's as it tries to grow its brand.
TXT
"The greatest trick the Panglossian Punditry ever attempted was convincing the world the Industrial #Recession didn’t exist… and just like that the longest non-recessionary streak of negative growth was gone," writes Hedgeye CEO Keith McCullough earlier this week.
About today's Industrial Production number, McCullough writes :
"US Industrial Production (released this morning) breaks a 15-month streak of negative Y/Y growth. And not to be outdone, Capacity Utilization is higher Y/Y for 1st time in 23-months. One month does not a positive @Hedgeye TREND make but 15-months of negative comps and improving growth make for a nice 2nd derivative yellow brick road."
One of Hedgeye Industrials analyst Jay Van Sciver's Best Ideas in the Industrials complex remains Textron (TXT).
CERN
Click here to read our analyst's original report.
We spoke with a Healthcare IT Consultant in early December 2016 who has been a reliable source of market intelligence for us over the years. The bottom line at the time, despite broader market concerns around a “Trump Pause”, was there has been no change in behavior post-election and much of the slowdown is driven by market conditions. However, the sell-side and market continued to think otherwise as reflected by an onslaught of downgrades heading into year-end.
Fast-forward to today after some relatively positive commentary from management at the JPMorgan Conference, we have seen a relief rally in Cerner (CERN) on a “less worse” thesis. While this may be the case, we continue to believe that 2017 new client bookings growth will be negative and fundamentals will continue to disappoint. Therefore, we would be looking to add to our Cerner short position on recent strength.
Below are takeaways from that conversation:
- A lot of concern among Hospital Executives regarding the possibility of a move toward a single-payor system under a Clinton Administration; Collective sigh of relief now that is off the table with Trump win and people are starting to warm up to the idea of a Trump administration.
- Some slowdown ahead of the election due to uncertainty, but the softness is really because there is no replacement opportunity left at the high end of the market; healthcare spending is a cycle, the flood gates were open and now they have closed.
- Switch did not flip on November 8th, hasn't seen any deals not get done or pushed as a result of the election. Deals that are happening are for financial reasons... to drive ROI; single-vendor migration to save third-party costs, revenue cycle optimization, etc.
- Non-critical investments scheduled for 2017 may be pushed to 2018 as Hospital CFOs seek more clarity on reimbursement environment.
- Fixed rate implementation is becoming more standard, with more hospitals expecting the vendor to guarantee some minimum level of performance or they don't get paid; two sided risk in implementation tied to cash flow and productivity.
- Working on a Cerner deal now where the hospital wants Cerner to be on the hook for third-party consulting implementation fees if there are project delays.
WFM
Click here to read our analyst's original report.
The reflation trade is well underway, with the latest CPI data showing continued acceleration. We anticipate this trend to continue into 2017. The latest data showed CPI – Food at Home improving 20bps to -2.0%, looking deeper into the data, Beef, which has been one of the more deflationary commodities, improved to -5.3% versus -6.0% in November.
We continue to believe that the grocers will benefit from this trend and Whole Foods Market (WFM) is a top pick for us given the turnaround nature of the story.
WMT
Click here to read our analyst's original report.
Wal-Mart's (WMT) top competitor, TGT, guided down 4Q earnings this week. It was written in the cosmos, and so is another guide down for 2017/18. Nov/Dec Sales at -1.3% vs 4Q guide of -1% to +1% while street is expecting flat comps. Yes, at a time when overall holiday sales in the US were otherwise fine (#losing share again).
Today, TGT is woefully underinvested in virtually any form of profitable growth – just as AMZN and WMT are stepping on the investment lever at a greater rate than any time in history. They’re both putting so much more in the box (everything from Music to Streaming) which is eroding TGT’s competitive position.
We’ve seen a sizable gap open up in the traffic rates between TGT and WMT. That’s no surprise given the amount of capital that’s been redeployed into the business from each of the parties involved. We think WMT is taking the right strategic actions in order to continuously win the market share battle.
PENN
Click here to read our analyst's original report.
Just this week Penn National Gaming (PENN) announced that it has entered into a new senior secured credit facilities and completed a refinancing of its existing credit facilities and senior unsecured notes. These recent capital market activities could very well be setting PENN up for a stock buyback program.
We’d also note that recent trends are improving, but sentiment still seems pretty negative on the regional gaming companies, which is a favorable set up provided that catalysts can come fruition. We continue to recommend shares of PENN Gaming.
MU
Micron Technology (MU) is going to experience a tight commodity market that is driving calendar 1Q17 pricing increases for its products across the board. The chart below comes from a previous note of ours, but the message still holds true.
